NORTHRIM BANCORP INC - Quarter Report: 2010 June (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-33501

NORTHRIM BANCORP, INC.

(Exact name of registrant as specified in its charter)

Alaska		92-0175752
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
3111 C Street Anchorage, Alaska (Address of principal executive offices)		99503 (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares of the issuer’s Common Stock outstanding at August 6, 2010 was 6,389,420.

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited): June 30, 2010, December 31, 2009 and June 30, 2009			4
Consolidated Statements of Income (unaudited): Three and six months ended June 30, 2010 and 2009			5
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (unaudited): Six months ended June 30, 2010 and 2009			6
Consolidated Statements of Cash Flows (unaudited): Six months ended June 30, 2010 and 2009			7
Notes to the Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			30
PART II OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. Removed and Reserved			31
Item 5. Other Information			31
Item 6. Exhibits			31
SIGNATURES			32
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.

Consolidated Balance Sheets

June 30, 2010, December 31, 2009 and June 30, 2009

		June 30,				December 31,				June 30,
		2010				2009				2009
		(Unaudited)								(Unaudited)
		(In Thousands, Except Share Data)
ASSETS
Cash and due from banks		$	22,316			$	19,395			$	23,509
Overnight investments			82,749				47,326				43,142
Investment securities available for sale			168,029				178,159				124,566
Investment securities held to maturity			7,018				7,285				10,128
Investment in Federal Home Loan Bank stock			2,003				2,003				2,003
Total investment securities			177,050				187,447				136,697
Loans held for sale			8,210				—				3,426
Loans			628,373				655,039				684,897
Allowance for loan losses			(14,427	)			(13,108	)			(13,187	)
Net loans			622,156				641,931				675,136
Purchased receivables, net			10,754				7,261				9,822
Accrued interest receivable			3,749				3,986				3,860
Premises and equipment, net			27,932				28,523				29,171
Goodwill and intangible assets			8,843				8,996				9,156
Other real estate owned			12,973				17,355				11,576
Other assets			38,642				40,809				33,624
Total assets		$	1,007,164			$	1,003,029			$	975,693
LIABILITIES
Deposits:
Demand		$	272,743			$	276,532			$	253,118
Interest-bearing demand			120,826				134,899				112,385
Savings			71,167				66,647				61,331
Alaska CDs			113,692				104,840				104,906
Money market			126,841				125,339				119,944
Certificates of deposit less than $100,000			58,815				64,652				70,773
Certificates of deposit greater than $100,000			87,401				80,199				96,684
Total deposits			851,485				853,108				819,141
Securities sold under repurchase agreements			8,871				6,733				4,633
Other borrowings			5,532				5,587				16,225
Junior subordinated debentures			18,558				18,558				18,558
Other liabilities			8,694				8,023				9,089
Total liabilities			893,140				892,009				867,646
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 6,386,925, 6,371,455, and 6,338,138 shares issued and outstanding at June 30, 2010, December 31, 2009, and June 30, 2009, respectively			6,387				6,371				6,338
Additional paid-in capital			52,484				52,139				51,760
Retained earnings			53,868				51,121				48,511
Accumulated other comprehensive income			1,242				1,341				1,406
Total Northrim BanCorp shareholders’ equity			113,981				110,972				108,015
Noncontrolling interest			43				48				32
Total shareholders’ equity			114,024				111,020				108,047
Total liabilities and shareholders’ equity		$	1,007,164			$	1,003,029			$	975,693

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Income

For the Three and Six Months Ended June 30, 2010 and 2009

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
						(In Thousands, Except Per Share Data)
Interest Income
Interest and fees on loans		$	11,212			$	12,396			$	22,634			$	24,454
Interest on investment securities:
Securities available for sale			1,245				937				2,499				2,000
Securities held to maturity			70				106				145				197
Interest on overnight investments			42				15				65				33
Interest on domestic certificate of deposit			—				1				—				58
Total Interest Income			12,569				13,455				25,343				26,742
Interest Expense
Interest expense on deposits, borrowings and junior subordianted debentures			1,466				1,789				2,936				3,900
Net Interest Income			11,103				11,666				22,407				22,842
Provision for loan losses			1,375				2,117				2,750				3,492
Net Interest Income After Provision for Loan Losses			9,728				9,549				19,657				19,350
Other Operating Income
Service charges on deposit accounts			762				775				1,462				1,478
Purchased receivable income			595				474				909				1,232
Employee benefit plan income			530				447				951				813
Electronic banking income			435				351				835				661
OREO sale and rental income			383				124				653				240
Equity in earnings from RML			182				764				109				1,612
Gain on sale of securities			132				196				413				196
Equity in earnings (loss) from Elliott Cove			(2	)			(28	)			3				(93	)
Other income			588				547				1,133				1,093
Total Other Operating Income			3,605				3,650				6,468				7,232
Other Operating Expense
Salaries and other personnel expense			5,402				5,708				11,022				11,159
Occupancy			897				897				1,816				1,812
Marketing expense			439				316				878				634
Insurance expense			422				959				980				1,764
Purchased receivable losses			406				—				407				(16	)
OREO expense net, including impairment			343				448				715				844
Professional and outside services			323				414				565				959
Equipment expense			244				257				517				520
Intangible asset amortization expense			77				83				153				165
Other operating expense			1,618				1,450				3,282				3,211
Total Other Operating Expense			10,171				10,532				20,335				21,052
Income Before Provision for Income Taxes			3,162				2,667				5,790				5,530
Provision for income taxes			912				681				1,614				1,508
Net Income			2,250				1,986				4,176				4,022
Less: Net income attributable to the noncontrolling interest			110				109				136				190
Net Income Attributable to Northrim BanCorp		$	2,140			$	1,877			$	4,040			$	3,832
Earnings Per Share, Basic		$	0.34			$	0.29			$	0.63			$	0.60
Earnings Per Share, Diluted		$	0.33			$	0.29			$	0.62			$	0.60
Weighted Average Shares Outstanding, Basic			6,386,925				6,396,341				6,386,343				6,394,965
Weighted Average Shares Outstanding, Diluted			6,473,622				6,402,502				6,470,966				6,398,045

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in
Shareholders’ Equity and Comprehensive Income

For the Six Months Ended June 30, 2010 and 2009

																		Accumulated
		Common Stock								Additional								Other
		Number				Par				Paid-in				Retained				Comprehensive				Noncontrolling
		of Shares				Value				Capital				Earnings				Income				Interest				Total
														(Unaudited)
														(In Thousands)
Six months ending June 30, 2009:
Balance as of January 1, 2009			6,331			$	6,331			$	51,458			$	45,958			$	901			$	36			$	104,684
Cash dividend declared			—				—				—				(1,279	)			—				—				(1,279	)
Stock option expense			—				—				299				—				—				—				299
Exercise of stock options			7				7				(4	)			—				—				—				3
Excess tax benefits from share-based payment arrangements			—				—				7				—				—				—				7
Distributions to noncontrolling interest			—				—				—				—				—				(194	)			(194	)
Comprehensive income:
Change in unrealized holding gain (loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				505				—				505
Net income attributable to the noncontrolling interest																							190				190
Net income attributable to Northrim BanCorp			—				—				—				3,832				—				—				3,832
Total Comprehensive Income																											4,527
Balance as of June 30, 2009			6,338			$	6,338			$	51,760			$	48,511			$	1,406			$	32			$	108,047
Six months ending June 30, 2010:
Balance as of January 1, 2010			6,371			$	6,371			$	52,139			$	51,121			$	1,341			$	48			$	111,020
Cash dividend declared			—				—				—				(1,293	)			—				—				(1,293	)
Stock option expense			—				—				258				—				—				—				258
Exercise of stock options			16				16				(15	)			—				—				—				1
Excess tax benefits from share-based payment arrangements			—				—				102				—				—				—				102
Distributions to noncontrolling interest																							(141	)			(141	)
Comprehensive income:
Change in unrealized holding gain (loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				(99	)			—				(99	)
Net income attributable to the noncontrolling interest																							136				136
Net income attributable to Northrim BanCorp			—				—				—				4,040				—				—				4,040
Total Comprehensive Income																											4,077
Balance as of June 30, 2010			6,387			$	6,387			$	52,484			$	53,868			$	1,242			$	43			$	114,024

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statement of Cash Flows

For the Six Months Ended June 30, 2010 and 2009

		Six Months Ended
		June 30,
		2010				2009
		(Unaudited)
		(In Thousands)
Operating Activities:
Net income		$	4,176			$	4,022
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(413	)			(196	)
Depreciation and amortization of premises and equipment			769				827
Amortization of software			84				81
Intangible asset amortization			153				165
Amortization of investment security premium, net of discount accretion			98				217
Deferred tax liability (benefit)			2,156				(744	)
Stock-based compensation			258				299
Excess tax benefits from share-based payment arrangements			(102	)			(7	)
Deferral of loan fees and costs, net			(300	)			(155	)
Provision for loan losses			2,750				3,492
Purchased receivable loss (recovery)			407				(16	)
Purchases of loans held for sale			(8,210	)			(75,160	)
Proceeds from the sale of loans held for sale			—				71,670
Gain on sale of loans held for sale			—				64
Gain\ on sale of other real estate owned			(281	)			(223	)
Impairment on other real estate owned			176				495
Earnings in excess of proceeds from RML			109				585
Equity in (income) loss from Elliott Cove			(3	)			93
Decrease in accrued interest receivable			237				952
(Increase) decrease in other assets			58				(1,226	)
Decrease (increase) of other liabilities			315				(703	)
Net Cash Provided by Operating Activities			2,437				4,532
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale			(91,037	)			(34,110	)
Purchases of investment securities-held-to-maturity			(517	)			(1,217	)
Proceeds from sales/maturities of securities-available-for-sale			101,318				51,390
Proceeds from calls/maturities of securities-held-to-maturity			780				520
Purchases of domestic certificates of deposit			—				14,500
Investment in Federal Home Loan Bank stock, net			—				(5,000	)
Investment in purchased receivables, net of repayments			(3,900	)			9,269
Loan paydowns, net of new advances			24,604				20,448
Proceeds from sale of other real estate owned			5,888				4,832
Investment in other real estate owned			(27	)			(1,172	)
Loan to Elliott Cove, net of repayments			(68	)			(54	)
Purchases of premises and equipment			(178	)			(265	)
Purchases of software			(100	)			(37	)
Net Cash Provided by Investing Activities			36,763				59,104
Financing Activities:
Decrease in deposits			(1,623	)			(24,111	)
Increase (decrease) in securities sold under repurchase agreements			2,138				(3,003	)
Increase (decrease) in borrowings			(55	)			(6,245	)
Distributions to noncontrolling interest			(141	)			(194	)
Proceeds from issuance of common stock			1				3
Excess tax benefits from share-based payment arrangements			102				7
Cash dividends paid			(1,278	)			(1,272	)
Net Cash Used by Financing Activities			(856	)			(34,815	)
Net Increase in Cash and Cash Equivalents			38,344				28,821
Cash and Cash quivalents at Beginning of Period			66,721				37,830
Cash and Cash Equivalents at End of Period		$	105,065			$	66,651
Supplemental Information:
Income taxes paid		$	7			$	1,441
Interest paid		$	2,934			$	4,251
Transfer of loans to other real estate owned		$	931			$	2,891
Loans made to facilitate sales of other real estate owned		$	1,883			$	—
Cash dividends declared but not paid		$	15			$	12

See notes to the consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2010 and 2009

1. Basis of Presentation

     The accompanying unaudited financial statements have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity. The Company determined that it operates as a single operating segment. Operating results for the interim period ended June 30, 2010, are not necessarily indicative of the results anticipated for the year ending December 31, 2010. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

2. Significant Accounting Policies and Recent Accounting Pronouncements

     The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, Fair Value Measurements. This update adds a new requirement to disclose transfers in and out of Level 1 and Level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of Level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around Level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for Level 1 and Level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for level 3 activities are effective for the Company on January 1, 2011. The adoption of the disclosure requirements for Level 1 and Level 2 transfers and the expanded qualitative disclosures had no impact on the Company’s financial position, results of operations, and earnings per share. The Company does not expect the adoption of the Level 3 disclosure requirements to have an impact on its financial position, results of operations, and earnings per share.

     In April 2010, the FASB issued ASU 2010-18, an update to ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. This update affects loans accounted for within pools under ASC 310-30. As a result of the amendments of ASU 2010-18, modifications of loans accounted for in these pools do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 is effective for the Company’s financial statements for annual and interim periods ending after July 15, 2010 and must be adopted prospectively. The Company does not expect that adoption will impact its financial position, results of operations, and earnings per share.

     In July 2010, the FASB issued ASU 2010-20, an update to ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. This update is intended to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The update requires expanded disclosures that will facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is effective for the Company’s financial statements for annual and interim periods ending after December 15, 2010 and must be adopted prospectively. The Company does not expect that adoption will impact its financial position, results of operations, and earnings per share.

3. Investment Securities

     The carrying values and approximate fair values of investment securities at June 30, 2010 and June 30, 2009, respectively, are presented below. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. There were four securities with unrealized losses as of June 30, 2010 and 2009, respectively, that had been in a loss position for less than twelve months. There were no securities with unrealized losses as of June 30, 2010 and 2009 that had been in a loss position for more than twelve months. Because the Company does not intend to sell, nor is it required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
							(In Thousands)
2010:
Securities available for sale
U.S. Treasury & government sponsored entities		$	126,042			$	827			$	65			$	126,804
Municpal Securities			6,174				195				—				6,369
U.S. Agency Mortgage-backed Securities			79				2				—				81
Corporate bonds			33,625				1,187				37				34,775
Total		$	165,920			$	2,211			$	102			$	168,029
Securities held to maturity
Municipal securities		$	7,018			$	243			$	—			$	7,261
Federal Home Loan Bank stock		$	2,003			$	—			$	—			$	2,003
2009:
Securities available for sale
U.S. Treasury & government sponsored entities		$	90,466			$	1,261			$	1			$	91,726
Municpal Securities			5,045				—				66				4,979
U.S. Agency Mortgage-backed Securities			94				1				—				95
Corporate bonds			26,574				1,195				3				27,766
Total		$	122,179			$	2,457			$	70			$	124,566
Securities Held to Maturity
Municipal Securities		$	10,128			$	179			$	—			$	10,307
Federal Home Loan Bank Stock		$	2,003			$	—			$	—			$	2,003

     The amortized cost and fair values of debt securities at June 30, 2010, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

										Weighted
		Amortized								Average
		Cost				Fair Value				Yield
				(In Thousands)
US Treasury and government sponsored entities
Within 1 year		$	32,054			$	32,465				2.50	%
1-5 years			93,988				94,339				1.93	%
Total		$	126,042			$	126,804				2.08	%
U.S. Agency Mortgage-backed securities
5-10 years		$	79			$	81				4.45	%
Total		$	79			$	81				4.45	%
Corporate bonds
Within 1 year		$	10,092			$	10,360				5.18	%
1-5 years			18,275				19,103				3.50	%
5-10 years			5,257				5,312				2.52	%
Total		$	33,625			$	34,775				3.85	%
Municipal securities
Within 1 year		$	1,770			$	1,790				3.85	%
1-5 years			4,028				4,209				3.83	%
5-10 years			5,214				5,370				4.59	%
Over 10 years			2,180				2,261				4.75	%
Total		$	13,192			$	13,630				4.28	%

     The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the six months ending June 30, 2010 and June 30, 2009, respectively, are as follows:

						Gross				Gross
June 30,		Proceeds				Gains				Losses
					(In Thousands)
2010:
Available for sale securities		$	19,363			$	413			$	—
Held to maturity securities		$	—			$	—			$	—
2009:
Available for sale securities		$	5,429			$	201			$	5
Held to maturity securities		$	—			$	—			$	—

     A summary of interest income for the six months ending June 30, 2010 and 2009 on available for sale investment securities is as follows:

June 30,		2010				2009
			(In Thousands)
US Treasury and government sponsored entities		$	1,652			$	1,200
U.S. Agency Mortgage-backed Securities			2				36
Other			701				644
Total taxable interest income		$	2,355			$	1,880
Municipal Securities			144				120
Total tax-exempt interest income			144				120
Total		$	2,499			$	2,000

     For the periods ending June 30, 2010, December 31, 2009 and June 30, 2009, we held Federal Home Loan Bank of Seattle (“FHLB”) stock with a book value approximately equal to its market value in the amounts of $2.0 million for each period. The Company evaluated its investment in FHLB stock for other-than-temporary impairment as of June 30, 2010, consistent with its accounting policy. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB of Seattle, the actions being taken by the FHLB of Seattle to address its regulatory capital situation, and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company did not recognize an other-than-temporary impairment loss. Even though the Company did not recognize an other-than-temporary impairment loss during the six-month period ending June 30, 2010, continued deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.

     The Company has never had any investment in the common or preferred stock of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, which are commonly known as Fannie Mae and Freddie Mac, respectively. Additionally, we held no securities of any single issuer (other than government sponsored entities) that exceeded 10% of our shareholders’ equity at June 30, 2010, December 31, 2009 or June 30, 2009.

4. Lending Activities

     At June 30, 2010, 29% of the portfolio was scheduled to mature over the next 12 months, and 30% was scheduled to mature between July 1, 2011, and June 30, 2015. The following table sets forth the Company’s loan portfolio composition by loan type for the dates indicated:

		June 30, 2010								December 31, 2009								June 30, 2009
			Dollar				Percent				Dollar				Percent				Dollar				Percent
			Amount				of Total				Amount				of Total				Amount				of Total
											(In Thousands)
Commercial		$	244,291				38	%		$	248,195				38	%		$	266,227				39	%
Construction/development			49,122				8	%			62,573				10	%			79,464				12	%
Commercial real estate			290,122				46	%			301,816				46	%			294,249				43	%
Home equity lines and other consumer			47,202				7	%			45,168				7	%			47,266				7	%
Loans in process			134				0	%			85				0	%			248				0	%
Unearned loan fees, net			(2,498	)			0	%			(2,798	)			0	%			(2,557	)			0	%
Sub total			628,373								655,039								684,897
Loans held for sale			8,210				1	%			—				0	%			3,426				0	%
Total loans		$	636,583				100	%		$	655,039				100	%		$	688,323				100	%

     Loans held for sale: The Company has purchased residential loans from our mortgage affiliate, RML, from time to time since 1998. During 2009, the Company renewed its agreement with RML in anticipation of higher than normal refinance activity in the Anchorage market. The Company then sold

these loans in the secondary market. The Company purchased $8.2 million and did not sell any loans in the six-month period ending June 30, 2010. The Company purchased $75.1 million and sold $71.7 million in loans in the six-month period ending June 30, 2009.

5. Allowance for Loan Losses, Nonperforming Assets and Loans Measured for Impairment

     The Company recorded a provision for loan losses in the amount of $1.4 and $2.8 million for the three and six-month periods ending June 30, 2010 based upon its analysis of its loan portfolio. The following table details activity in the Allowance for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,										June 30,
			2010				2009				2010				2009
							(In Thousands)
Balance at beginning of period		$	14,046			$	13,364			$	13,108			$	12,900
Charge-offs:
Commercial			842				1,137				1,634				1,148
Construction/development			—				207				79				1,070
Commercial real estate			120				998				120				1,058
Home equity lines and other consumer			174				57				253				141
Total charge-offs			1,136				2,399				2,086				3,417
Recoveries:
Commercial			114				97				618				167
Construction/development			4				—				4				—
Commercial real estate			11				—				11				9
Home equity lines and other consumer			13				8				22				36
Total recoveries			142				105				655				212
Net, (recoveries) charge-offs			994				2,294				1,431				3,205
Provision for loan losses			1,375				2,117				2,750				3,492
Balance at end of period		$	14,427			$	13,187			$	14,427			$	13,187

     At June 30, 2010, the allowance for loan losses was $14.4 million as compared to $13.2 million, at June 30, 2009. The increase in the allowance for loan losses at June 30, 2010 as compared to June 30, 2009 was the result of a $2.8 million provision and $1.4 million in net charge-offs. The Company’s ratio of nonperforming loans compared to portfolio loans at June 30, 2010 was 2.45% as compared to 2.92% as of June 30, 2009. The Company’s ratio of allowance for loan losses compared to portfolio loans at June 30, 2010 was 2.30% as compared to 1.93% as of June 30, 2009. While the Company’s ratio of nonperforming loans compared to portfolio loans has decreased as of June 30, 2010, the Company believes that a higher reserve is appropriate to address the impact of the current economic environment on our loan portfolio.

     Nonperforming assets consist of nonaccrual loans, accruing loans of 90 days or more past due, restructured loans, and other real estate owned (“OREO”). The following table sets forth information with respect to nonperforming assets:

		June 30, 2010			December 31, 2009					June 30, 2009
			(In Thousands)
Nonaccrual loans		$	14,413			$	12,738			$	18,111
Accruing loans past due 90 days or more			1,000				1,000				1,893
Restructured loans			—				3,754				—
Total nonperforming loans			15,413				17,492				20,004
Other real estate owned			12,973				17,355				11,576
Total nonperforming assets		$	28,386			$	34,847			$	31,580
Allowance for loan losses		$	14,427			$	13,108			$	13,187
Nonperforming loans to gross loans			2.45	%			2.67	%			2.92	%
Nonperforming assets to total assets			2.82	%			3.47	%			3.24	%
Allowance to gross loans			2.30	%			2.00	%			1.93	%
Allowance to nonperforming loans			93.60	%			74.94	%			65.92	%

6. Goodwill and Other Intangibles

     The Company performs goodwill impairment testing in accordance with the policy described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. There was no indication of impairment as of June 30, 2010. The Company continues to monitor the Company’s goodwill for potential impairment on an ongoing basis. No assurance can be given that there will not be an impairment charge to earnings during 2010 for goodwill impairment, if, for example, our stock price declines and continues to trade at a significant discount to its book value, although there are many factors that we analyze in determining the impairment of goodwill.

7. Variable Interest Entities

     The Company has analyzed all of its affiliate relationships in accordance with Accounting Standards Codification 810-10-50-12 and 50-13 and determined that Elliott Cove is a variable interest entity (“VIE”). However, the Company does not have a controlling interest in Elliott Cove. The Company owns a 48% equity interest in Elliott Cove, an investment advisory services company, through its wholly—owned subsidiary, Northrim Investment Services Company (“NISC”). The Company determined that Elliott Cove is a VIE based on the fact that the Company provides Elliott Cove with a line of credit that has a committed amount of $750,000 and an outstanding balance of $746,000 as of June 30, 2010. As such, it appears that Elliott Cove cannot finance its activities without additional subordinated financial support and is therefore considered a VIE under GAAP. However, the Company does not have a controlling interest in Elliott Cove because it does not have the power to direct Elliott Cove’s activities, nor does it have an obligation to absorb losses or receive benefits from earnings that are disproportionate to its ownership. The Company does not have any arrangements or guarantees to Elliott Cove outside of the line of credit, and it does not have any exposure to additional losses outside of its share in Elliott Cove’s net income. The line of credit to Elliott Cove is included in other assets in the Company’s Consolidated Balance Sheets.

8. Deposit Activities

     Total deposits at June 30, 2010, December 31, 2009 and June 30, 2009 were $851.5 million, $853.1 million and $819.1 million, respectively. The only deposit category with stated maturity dates is certificates of deposit. At June 30, 2010, the Company had $146.2 million in certificates of deposit as compared to certificates of deposit of $144.9 million and $167.5 million, for the periods ending December 31, 2009 and June 30, 2009, respectively. At June 30, 2010, $107.6 million, or 74%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to

$100.1 million, or 69%, of total certificates of deposit, at December 31, 2009, and $136.3 million, or 81%, of total certificates of deposit at June 30, 2009.

9. Stock Incentive Plan

     The Company set aside 330,750 shares of authorized stock for the 2004 Stock Incentive Plan (“2004 Plan”) under which it may grant stock options and restricted stock units. During the second quarter ended June 30, 2010, the Company’s shareholders approved the 2010 Stock Option Plan (“2010 Plan”) under which it may grant 325,000 shares of stock in the form of stock options and restricted stock units. The Company’s policy is to issue new shares to cover awards. The total number of stock options and restricted stock units outstanding under the 2004 and 2010 Plans and previous stock incentive plans at June 30, 2010 was 407,298, which includes 322,448 shares granted under the 2004 Plan leaving 348,232 shares available for future awards. Under the 2004 Plan, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted. Optionees, at their own discretion, may cover the cost of exercise through the exchange, at the fair market value, of already owned shares of the Company’s stock. Options are granted for a 10-year period and vest on a pro rata basis over the initial three years from grant. In addition to stock options, the Company has granted restricted stock units to certain key employees under the 2004 Plan. These restricted stock grants cliff vest at the end of a three-year time period.

     The Company recognized expenses of $94,000 and $90,000 on the fair value of restricted stock units and $35,000 and $60,000 on the fair value of stock options for a total of $129,000 and $150,000 in stock-based compensation expense for the three-month periods ending June 30, 2010 and 2009, respectively. For the six-month periods ending June 30, 2010 and 2009, the Company recognized expense of $189,000 and $178,000, respectively, on the fair value of restricted stock units and $69,000 and $121,000, respectively, on the fair value of stock options for a total of $258,000 and $299,000, respectively, in stock-based compensation expense.

     There were no exercises of stock options and no restricted stock units vested in the three months ended June 30, 2010. Proceeds from the exercise of stock options for the three months ended June 30, 2009 were $71,000. The Company withheld shares valued at $68,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options or the vesting of restricted stock units for the three-month period ending June 30, 2009. The Company recognized tax deductions of $15,000 related to the exercise of these stock options and $41,000 related to the vesting of restricted stock units during the quarter ended June 30, 2009.

     Proceeds from the exercise of stock options for the six months ended June 30, 2010 and 2009 were $497,000 and $71,000, respectively. The Company withheld shares valued at $496,000 and $72,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options or the vesting of restricted stock units for the six-month periods ending June 30, 2010 and 2009, respectively. The Company recognized tax deductions of $102,000 and $15,000, respectively, related to the exercise of stock options during the six months ended June 30, 2010 and 2009, respectively. The Company recognized tax deductions of $41,000 related to the vesting of restricted stock units during the six months ended June 30, 2009. There were no restricted stock units that vested during the six months ended June 30, 2010.

10. Fair Value of Assets and Liabilities

     The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

     Level 1: Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

     Level 2: Valuation is based upon quoted market prices for similar instruments in active markets,

quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

     Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

     The following methods and assumptions were used to estimate fair value disclosures. All financial instruments are held for other than trading purposes.

Cash, Due from Banks and Overnight Investments: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Investment Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Investments in Federal Home Loan Bank stock are recorded at cost, which also represents fair value.

Loans Held for Sale: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Loans: Fair value adjustments for loans are mainly related to credit risk, interest rate risk, required equity return, and liquidity risk. Credit risk is primarily addressed in the financial statements through the allowance for loan losses (see Note 5). Loans are valued using a discounted cash flow methodology and are pooled based on type of interest rate (fixed or adjustable) and maturity. A discount rate was developed based on the relative risk of the cash flows, taking into account the maturity of the loans and liquidity risk. Impaired loans are carried at fair value. Specific valuation allowances are included in the allowance for loan losses. The carrying amount of accrued interest receivable approximates its fair value.

Purchased Receivables: Fair values for purchased receivables are based on their carrying amounts due to their short duration and repricing frequency.

Deposit Liabilities: The fair values of demand and savings deposits are equal to the carrying amount at the reporting date. The carrying amount for variable-rate time deposits approximate their fair value. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly maturities of time deposits. The carrying amount of accrued interest payable approximates its fair value.

Borrowings: Due to the short term nature of these instruments, the carrying amount of short-term borrowings reported in the balance sheet approximate the fair value. Fair values for fixed-rate long-term borrowings are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly payments.

Junior Subordinated Debentures: Fair value adjustments for junior subordinated debentures are based on the current discounted cash flows to maturity. Management utilized a market approach to determine the appropriate discount rate for junior subordinated debentures.

Assets subject to nonrecurring adjustment to fair value: The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets or OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write down of individual assets.

Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar

agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

     Estimated fair values as of June 30, 2010 and December 31, 2009 are as follows:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
						(In Thousands)
Financial assets:
Cash and cash equivalents		$	105,065			$	105,065			$	66,721			$	66,721
Investment securities			174,941				177,294				187,447				187,678
Net loans			622,156				579,084				641,931				616,476
Purchased receivables			10,754				10,754				7,261				7,261
Accrued interest receivable			3,749				3,749				3,986				3,986
Financial liabilities:
Deposits		$	851,485			$	850,340			$	853,108			$	841,629
Accrued interest payable			396				396				394				394
Borrowings			14,403				13,715				12,320				11,674
Junior subordinated debentures			18,558				11,589				18,558				10,111
Unrecognized financial instruments:
Commitments to extend credit(1)			182,176			$	1,822				166,704			$	1,667
Standby letters of credit(1)			17,612				176				16,913				169

     The following table sets forth the balances as of June 30, 2010 and 2009 of assets and liabilities measured at fair value on a recurring basis:

						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable Inputs
		Total				Assets (Level 1)				Inputs (Level 2)				(Level 3)
										(In Thousands)
2010:
Available for sale securities
U.S. Treasury & government sponsored		$	126,804				—			$	126,804				—
Municipal Securities			6,369				—				6,369				—
U.S. Agency Mortgage-backed Securities			81								81
Corporate bonds			34,775				—				34,775				—
Total		$	168,029				—			$	168,029				—
2009:
Available for sale securities
U.S. Treasury & government sponsored		$	91,726				—			$	91,726				—
Municipal Securities			4,979				—				4,979				—
U.S. Agency Mortgage-backed Securities			95								95
Corporate bonds			27,766				—				27,766				—
Total		$	124,566				—			$	124,566				—

     As of and for the six months ending June 30, 2010 and 2009, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table:

						Quoted Prices in				Significant
						Active Markets				Other				Significant				Total
						for Identical				Observable				Unobservable Inputs				(gains)
		Total				Assets (Level 1)				Inputs (Level 2)				(Level 3)				losses
										(In Thousands)
2010:
Loans measured for impairment1		$	5,081				—			$	4,237			$	844			$	(864	)
Other real estate owned2			498				—				—				498				176
Total		$	5,579				—			$	4,237			$	1,342			$	(688	)
2009:
Loans measured for impairment1		$	14,481				—			$	6,007			$	8,474			$	660
Other real estate owned2			3,134				—				—				3,134				495
Total		$	17,615				—			$	6,007			$	11,608			$	1,155

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This discussion should be read in conjunction with the unaudited financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Note Regarding Forward Looking-Statements

     This quarterly report on Form 10-Q includes forward-looking statements, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, and the strength of the local economy. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the Alaska economy; factors that impact our net interest margin; and our ability to maintain asset quality. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Item 1A Risk Factors of this report, and in our other filings with the SEC. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law.

Critical Accounting Policies

     The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

     The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company’s critical accounting policies include those that address the accounting for the allowance for loan losses, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. The Company has not made any significant changes in its critical accounting policies or its estimates and assumptions from those disclosed in its Form 10-K as of December 31, 2009. These critical accounting policies are further described in Management’s Discussion and Analysis and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Form 10-K as of December 31, 2009. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.

     There were new accounting pronouncements that became effective for the Company on January 1, 2010. See Note 2 of the Notes to the Consolidated Financial Statements in this Form 10-Q for a summary of the pronouncements and discussion of the impact of their adoption on the Company’s consolidated financial statements.

Economic Conditions

     Throughout this economic cycle, Alaska has faired far better than some other parts of country, and the Company is benefiting from strong natural resources and tourism sectors, as well as government operations. There are now two competing proposals for a gas pipeline from the oil and gas fields in northern Alaska to the lower 48 states. If either of these proposals proceeds, the projected infrastructure investment is expected to be substantial and may bring many jobs to the state. However, discussions for this project have been ongoing for years, and the project is still a long way from breaking ground.

     Both the U.S. and Alaska continue to have higher than average historical delinquency rates. At the end of the first quarter of 2010, 4.6% of all residential mortgage loans were delinquent in Alaska up from 3.8% at the end of 2008. This delinquency rate was a 0.2% decline from the fourth quarter of 2009. Nationally, delinquencies were 9.4% at the end of the first quarter of 2010, up from 8.6% at the end of 2008 and down 1.0% from the end of 2009. Total foreclosures in Alaska at March 31, 2009 were 1.3%, down from 1.4% at the end of 2009 and up from 0.9% at the end of 2008. Nationally, total foreclosures have grown to 4.6% at March 31, 2010 from 3.3% at December 31, 2008.

Highlights and Summary of Performance — Second Quarter of 2010

	•		Northrim, already well-capitalized, continued to strengthen its capital ratios with Tier 1 Capital to risk adjusted assets at 14.77% as compared to 14.31% in the immediate prior quarter and 13.50% a year ago. These ratios do not reflect any government investment in Northrim as the company elected not to participate in the Capital Purchase Program sponsored by the U. S. Treasury in 2008.
	•		Northrim’s tangible common equity to tangible assets at quarter end was 10.53%, up from 10.23% a year earlier. Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. The GAAP measure of equity to assets is total equity divided by total assets. Total equity to total assets was 11.32% at June 30, 2010 as compared to 11.07% at June 30, 2009.
	•		Book value was $17.85 per share and tangible book value was $16.46 per share, up from $17.04 and $15.60 respectively a year earlier.
	•		Nonperforming assets declined in the quarter to $28.4 million or 2.82% of total assets at June 30, 2010, compared to $31.6 million, or 3.20% of total assets at March 31, 2010.
	•		The allowance for loan losses totals 2.30% of gross loans at June 30, 2010, compared to 2.17% at March 31, 2010, and 1.93% a year ago. The allowance for loan losses to nonperforming loans also improved to 93.60% at June 30, 2010 from 65.92% a year ago.
	•		Residential construction loans declined to $49.1 million or 8% of portfolio loans at June 30, 2010, from $79.5 million, or 12% of portfolio loans, a year ago.
	•		Other operating income that includes revenues from finance charges, electronic banking, and financial services affiliates contributed 25% of total second quarter revenues and 22% of year-to-date revenues.

     The Company reported net income and diluted earnings per share of $2.1 million and $0.33, respectively, for the quarter ending June 30, 2010 compared to net income and diluted earnings per share of $1.9 million and $0.29, respectively, for the quarter ending June 30, 2009. The slight increase in net income from the prior year was primarily attributable to decreases in the provision for loan losses and other operating expenses, net of decreases in net interest income and other operating income and an increase in the provision for income taxes.

     Northrim’s total assets grew 3% to $1.01 billion at June 30, 2010 from $976 million at June 30, 2009, with an increase in portfolio investments offsetting continuing maturities in the construction loan portfolio and lower levels of commercial loans. The loan portfolio receded 8% in the second quarter to $628 million from $685 million a year ago. The loan portfolio continues to show about 86% of the customers are located in the greater Anchorage area and 14% are in the Fairbanks area.

     The loan portfolio remains diversified with commercial loans accounting for 38% of the portfolio and commercial real estate accounting for 46% of the portfolio at June 30, 2010. Construction

and land development loans, which account for 8% of the loan portfolio at June 30, are down 38% to $49.1 million from $79.5 million a year ago, reflecting the maturing of projects funded in past years, the reduction in new projects started in the past two years, and continuing successful collection efforts.

Credit Quality and Nonperforming Assets

     Nonperforming assets at June 30, 2010, declined by $3.2 million year-over-year and from the preceding quarter. The risk profile of the portfolio improved as a result of the following developments:

	•		Loans measured for impairment decreased to $25.1 million at June 30, 2010, compared to $44.0 million at March 31, 2010, and $67.1 million in the second quarter a year ago.
	•		Nonperforming loans totaled $15.4 million, or 2.45% of total portfolio loans, compared to $20.0 million, or 2.92% of total portfolio loans a year ago.
	•		All construction and development projects in Other Real Estate Owned (OREO) are substantially complete and are being marketed.
	•		The $5.3 million condominium conversion project in Anchorage that moved into OREO last quarter continues to generate rental income producing an average yield of approximately 5%. Of the 68 original units, 32 condos have been sold and 36 are rented, providing positive cash flow for the project.
	•		Net charge-offs in the second quarter of 2010, totaled $994,000, or 0.16% of average loans, compared to net charge-offs of $2.3 million, or 33% of average loans during the second quarter of 2009. Year-to-date net charge-offs totaled $1.4 million, or 0.45%, annualized, of average loans, down from $3.2 million, 0.91%, annualized, of average loans in the first half of 2009.
	•		Restructured loans remained at zero at June 30, 2010 as compared to $3.8 million and zero at December 31, 2009 and June 30, 2009, respectively.
	•		Sales of OREO continued during the second quarter, with 25 properties sold for an aggregate of $3.9 million, generating a $211,000 net gain over current carrying value. Year-to-date OREO sales generated $5.9 million in gross proceeds, $281,000 in gain on sale of 36 properties total.
	•		The coverage ratio of the allowance to nonperforming loans increased to 93.60% at June 30, 2010, compared to 65.92% in the second quarter a year ago.

     At June 30, 2010, management had identified potential problem loans of $13.7 million as compared to potential problem loans of $17 million at December 31, 2009 and $16.2 million at June 30, 2009. Potential problem loans are loans which are currently performing and are not included in nonaccrual loans, accruing loans 90 days or more past due, or troubled debt restructurings (“TDRs”) that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or TDRs. The $3.3 million decrease in potential problem loans at June 30, 2010 from December 31, 2009 is primarily due to the transfer of one $3.3 million residential land development loan to nonaccrual status.

     At June 30, 2010, December 31, 2009 and June 30, 2009 the Company held OREO of $13.0 million, $17.4 million and $11.6 million, respectively. As of June 30, 2010, OREO consists of $8.1 million in condominiums, $4.1 million in residential lots in various stages of development, $322,000 in commercial property and $471,000 in single family residences. During the second quarter of 2010, additions to OREO included the Company’s share of a condominium project that totaled $189,000. During the second quarter of 2010, the Company received approximately $3.9 million in proceeds for the sale of OREO which included $3.6 million from the sale of condominiums and $266,000 from the sale of residential lots.